Friday, October 12, 2012

PARIS — A month ago, as a U.S. congressional committee prepared to warn American telecommunications networks against buying from two Chinese suppliers, the founder of one of those companies was finding a warmer reception in London. There, he posed for photos with Prime Minister David Cameron of Britain in front of the fireplace at 10 Downing Street in London.

Declaring that Britain was “open for business,” Mr. Cameron announced that his guest, Ren Zhengfei, the chief executive of Huawei, had agreed to expand the company’s already sizable operations in Britain with an investment of £1.2 billion, or $2 billion.

Given the typically close cooperation between the United States and Britain on security issues, the trans-Atlantic divide over Huawei and another Chinese equipment provider, ZTE, is striking. On Monday, the Intelligence Committee of the U.S. House of Representatives branded the companies security threats and raised the possibility that their gear could be used to spy on American interests if used in U.S. telecommunications networks.

Huawei has rejected the allegations as “little more than an exercise in China bashing and misguidedprotectionism.”

By contrast, said Roland Sladek, a spokesman for Huawei, “Europe is almost like a second home market for us.”

And for good reason. Huawei means jobs and investment for Britain and, more broadly, for Europe. The company already has 800 employees in Britain and a research center in Ipswich. The investment announced by Mr. Ren is expected to create 700 jobs in five years and additional technical centers in the country. In all, the company has about 7,300 employees in Europe.

Mr. Cameron’s government said it had no plans to change its relationship with the Chinese company in the wake of the U.S. committee’s recommendations. But in a trust-but-verify approach to the partnership, Huawei set up a Cyber Security Evaluation Center two years ago in Banbury, England. There, its engineers work alongside officials of Government Communications Headquarters, a British spy agency, to vet Huawei equipment for use in Britain.

“We recognize, of course, that no systems can be completely invulnerable, but by working together we can mitigate some of the risks,” said a spokesman for the Cabinet Office in London, who asked not to be identified as a matter of government policy.

Huawei counts as its customers many of the biggest telecommunications companies in Europe, including BT and Vodafone of Britain, Telefónica of Spain and Everything Everywhere, a partnership between France Télécom and Deutsche Telekom in Britain. The company’s equipment is in high demand, analysts say, as those companies scramble to roll out next-generation wireless broadband networks.

ZTE’s European telecommunications clients include KPN of the Netherlands. In Sweden ZTE is working with Hutchison Whampoa of Hong Kong on a high-speed wireless network.

As the world’s second-largest supplier of telecommunications network equipment, after Ericsson of Sweden, Huawei generated only 4 percent of its $32.4 billion in revenue in 2011 in the United States. In Europe, Huawei has gotten a friendlier welcome. Europe accounted for nearly 12 percent of its revenue last year, and sales in the region rose 26 percent last year, more than twice the company’s worldwide growth rate.

BT, which uses Huawei gear in the metal-clad sidewalk boxes where local telephone lines are fed into the company’s network, considers Huawei a “trusted equipment supplier,” the company said.

“We find them to be good value and high quality — that’s why they have been chosen as a supplier in a fiercely competitive international market,” BT added.

The company declined to comment on whether it had received any requests from U.S. officials to stop doing business with Huawei. The Cabinet Office spokesman said he was unaware of any such pressure.

“We don’t see this as an issue that affects our relationship,” he said.

The U.S. House committee said Huawei and ZTE had offered to set up review systems to address U.S. concerns, like the possibility of “back doors” that would allow Chinese government officials to tap into U.S. telecommunications traffic. But the committee’s report says that unlike in Britain, the companies offered only to let outside security contractors, rather than government officials, do the monitoring.

Huawei disputes this version of events, with Mr. Sladek saying the company had “indicated its openness to consider all options in dialogue with the U.S. authorities,” including the creation of a system like the one in Britain.

In any case, the congressional report concludes that “unfortunately, there are concerns that such efforts, if taken in the United States, will fall short of addressing security concerns, given the breadth and scale of the U.S. telecommunications market.”

Huawei says it is the second-biggest Chinese investor in Europe — after Zhejiang Geely, which owns the Swedish carmaker Volvo — and the biggest Chinese employer in the region. Executives say that additional investments in Europe will be announced in the coming weeks and that the company’s plans will be unaffected by the developments in the United States.

The company wants to make Europe a focus of its efforts to expand its smartphone business, which has been smaller than its network infrastructure division. In the coming weeks, Huawei plans to roll out new handsets to compete with devices like Apple’siPhone.

Even outside the United States, however, there are some worrying signs for Huawei and ZTE. While the Chinese companies have attempted to portray the report by the House Intelligence Committee as being out of step with what is happening in the rest of the world, similar concerns have been raised elsewhere.

In March, the government of Australia blocked Huawei from supplying equipment for a national broadband network that country is building. This week, after the release of the congressional report in Washington, Canadian officials indicated that they were inclined to exclude Huawei from participating in the construction of a secure government communications system.

Japan, too, has been a tough market for Huawei to crack. And in Europe, one major telecommunications provider has ruled out the use of the company’s equipment in its domestic market because of security concerns, according to a person briefed on purchasing decisions, who spoke on condition of anonymity because the information has not been publicly disclosed.

In July, a French senator, Jean-Marie Bockel, presented a report calling on the government to ban the use of routers and other equipment from Huawei and ZTE in French telecommunications networks. Mr. Bockel, a former high-ranking official in the Defense Ministry, cited concerns similar to those raised by the U.S. House committee.

“I am not at all against Huawei developing its business in Europe,” Mr. Bockel said by telephone. “But on the subject of security, I am in full agreement with the Americans. We should not be naïve.”

Mr. Bockel’s report has been submitted to the Defense Ministry, though the government of President François Hollande has not taken action on it. The French cybersecurity agency declined to comment.

Meanwhile, trade officials at the European Commission in Brussels are scrutinizing the operations of Huawei and ZTE, amid allegations — denied by the companies — that they may have received unfair subsidies or engaged in so-called dumping of telecommunications gear, or selling it below their own production costs in order to undercut competitors.

The commission has received no complaints from European rivals of the Chinese companies, which would be the normal prerequisite for an anti-dumping or anti-subsidy case. Analysts say, however, that that could be for fear of reprisals. European telecommunications suppliers like Alcatel-Lucent, Ericsson and Nokia do not want to be shut out of the fast-growing Chinese market.

Karel De Gucht, the E.U. trade commissioner, is considering a formal investigation against the companies on the commission’s own initiative.

“Mr. De Gucht continues to actively gather evidence so as to be ready to launch the case as and when required,” said a senior E.U. official, who insisted on anonymity because of the preliminary nature of the proceedings.

Despite the possible challenges for Huawei and ZTE, both companies say Europe remains a much friendlier place for them to do business than the United States.

“Compared with the U.S. market, the European market is much more open and much more transparent,” said David Dai Shu, a spokesman for ZTE.